Closed Corporation

Closed Corporation

A type of business corporation that is owned and operated by a small group of people.

A closed corporation is also known as a close corporation, a family corporation, an incorporated partnership, and a chartered partnership. In this type of corporation all of the functions are usually performed by the same parties. These individuals serve as shareholders, officers, and directors and are involved in the management and operation of the business. A closed corporation differs from a publicly held corporation since its stock is neither issued nor traded to the public at large.

IN CASES INVOLVING DIVORCING SPOUSES WHO OWN closely held corporations, the courts have had conflicting opinions about the tax consequences to the spouses if the corporation, or one spouse, redeems the other's stock.

However, when the transfer involves a third party such as a closely held corporation, the tax consequences may be less predictable.

Buy-sell agreements can benefit both surviving shareholders and a deceased shareholder's estate, by guaranteeing that stock in a closely held corporation will have buyers and will not be sold to outsiders.

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